Sorry, Advocates, The Minimum Wage Debate Is Not Over

Advocates on both sides of the fence like to imagine that the empirical debate over minimum wage impacts is over. Unfortunately for them, the academic debate over the evidence is still very much alive. The latest entry comes from Jeffrey Clemens, who defends his earlier research with follow-up work. In particular, he makes the case that focusing on within-region variation is a worse approach and that if anything, states affected more by the minimum wage had bigger Great Recession shocks than others. There is also research from Jonathan Meer and Jeremy West, and the Seattle study has showed that the small wage hikes (no, it’s not a $15 minimum wage hike yet, it’s only begun to be phased in) concluded “Seattle’s low-wage workers show some preliminary signs of lagging behind similar workers in comparison regions”.

On the other side of the aisle, you find people who seem to believe that it is impossible that small to modest minimum wage increases do not decrease employment. As someone who is critical of the minimum wage and believes it should be zero, let me tell you this is incorrect. It is entirely possible that small minimum wage hikes in some places in some times can have no effect on employment, and it would not overturn everything we know about economics.This is absolutely an empirical question.

First off, however likely or unlikely it is that monopsony power is a widespread economic phenomenon, firm market power surely exists in some places and at some times. Quasi rents and relatively fixed ratios of capital to labor may also exist. Employers may be willing to give up a piece of their quasi rents without really figuring out how to run their restaurant with fewer workers. Firms may also take away certain work perks, which could be something as qualitative as pushing management to make sure workers aren’t slacking, or being generous with overtime pay and breaks. What’s more, small minimum wage hikes often effect very few workers, and so you may only need a few of these other mechanisms to operate in very small ways to offset the effects.

But accepting the possibility of such mechanisms, or the possibility that small hikes do not appear to hurt employment, does not mean you have to agree the minimum wage is a good idea. So those who don’t like the minimum wage should not be afraid to admit this.

For on thing, the minimum wage can be bad for reasons other than it leading to job losses in the area that it is implemented. For example, both the Seattle study and another new study showed that minimum wage hikes lead to low-skilled workers looking for work outside of the affected area, either by moving or commuting. What could be happening is that forced to offer higher wages, skilled workers from outside the area move in to compete in the lower skilled labor market. For example, someone with a bachelor degree moves into a city with a minimum wage hike to be a barista, crowding out low skilled workers who must then commute or move out of the city. Notice there is no net employment effect in the affected area, yet low-skilled workers are left worse off.

You also might object to the minimum wage because it reduces the employment boosting effects of the EITC, and you favor an EITC and no minimum wage as the optimal way to help low-skilled workers.

Finally, you might place the minimum wage research in the wider context of labor demand research. It is not anti-empiricism to say that the minimum wage specific research is the only empirical evidence that matters. People who seem to be making “faith based appeals” to Econ 101 may instead be considering the wider empirical literature on labor demand. Personally, I find the minimum wage literature to be informative, and on net leaning towards showing job losses. But the wider labor demand literature is not irrelevant. It’s important though for those who think this to not simply make faith based appeals to downward sloping labor demand. How much it slopes downward, and at what wages, is an empirical issue. If you are basing this on a wider literature, lets discuss that wider literature.

So this is what I would implore to both sides of the debate. Minimum wage proponents, including some economists, vastly overstate their case when they say there is absolutely no evidence the minimum wage leads to job loss. I entirely respect the opinion of people who look at the evidence and decide that on balance it shows small to no job losses at the minimum wages we have seen. Some labor economists much smarter than me hold this belief, and some labor economists much smarter than me disagree. There is room for reasonable disagreement. But there is not “no evidence”.

On the other side, you should admit that it is possible that the small minimum wage hikes we have seen have not reduced employment in the affected areas and that this is an empirical question. If you are unpersuaded by the existing empirical literature and are appealing to the wider literature on labor demand, then tell us that and don’t simply appeal to basic supply and demand, and then talk about that literature and why you find it persuasive. Econ 101 tells us supply and demand curves exist, but it doesn’t tell us what their slopes are.